7 Auto Loan Myths, Debunked

Securing financing for an auto loan can be a discouraging and intimidating process for borrowers. Common auto loan myths confuse people even further and make it more difficult for individuals to take control of their finances. Understanding the facts can help borrowers make better decisions.

These seven auto loan myths can steer you in the wrong direction. Learn how you can avoid making these mistakes and shop with confidence.

1. All that matters is the monthly payment.

It’s certainly important that the monthly payment amount fits into your budget but if that’s your only focus you’ll end up paying more than you thought. Pay attention to the amount of interest you are being charged and the term of the loan. Compare offers and see what your options are.

Extending the term of a loan may lower your monthly payments but you will be paying that loan for a longer time and at a higher interest rate. You generally end up paying much more over the life of the loan. Don’t let low monthly payments distract you from the details of what you’re being offered.

2. If I’m approved for a loan it means I can afford the car.

One of the more popular auto loan myths is that you can’t get a loan for more money than you can afford. Banks and financial institutions assess the likelihood that you will repay a loan and not the strain that carrying that loan may pose. Buying the most expensive vehicle you are able to finance is not a good idea.

You have to be realistic about your income and expenses to figure out what monthly payment you can comfortably afford. As a general rule your car should account for no more than 10% of your take home pay. Assess your particular situation and analyze your financial obligations, lifestyle, and plans for the future.

3. When I pay off my loan it means it’s time for a new car.

Most auto loans take a few years to pay off and in that time you can get used to making those monthly payments. When that last payment is made it can be tempting to sign up for more payments and trade in your car for something new. The opposite is actually true and that is the time to enjoy your car without having to make any further payments on it.

If you have paid off your loan and the car is still functional and suits your life then this is the opportunity to get ahead. Now that your car is used it loses value more slowly than it did when it was brand new. Setting aside the money you would have spent on car payments can get you a nice down payment for the next car and when the time comes you’ll be able to borrow less, pay that loan off early, and be in an even better financial situation for the following vehicle.

4. Dealer car loan rates are non-negotiable.

Car dealers are middlemen for those auto loans and middlemen generally get paid for their services. There is usually a markup on those third-party loans and you shouldn’t pass up the opportunity to negotiate those rates. There is nothing to lose by asking.

Before you talk to the dealer at all it’s a good idea to see what you can qualify for elsewhere. Check with a few banks and financial institutions to get a better idea of your credit score and the interest rates you are offered. Get quotes online to broaden your search and weigh all your options.

5. If I make a mistake I’ll be stuck with a bad loan.

Some auto loan myths can put so much pressure on making the right decision that it can be crippling. Luckily the myth that choosing a bad auto loan means you’re stuck with it for the life of the loan simply isn’t true. There are many circumstances where refinancing may be a good choice saving hundreds or even thousands.

If you made a bad choice on your first try, shop around and refinance your auto loan at a better rate. Interest rates fluctuate and sometimes a loan that was a great deal a while ago might not be quite so great now. Refinancing can get you the current rate and save you money. Another time to consider refinancing is if your credit score has improved and you now qualify for a better interest rate.

6. Lower down payment means more money for other expenses.

Skimping on the down payment means borrowing more and incurring additional finance charges. When you add up everything you end up paying for the service of borrowing money, a higher principal on a loan means you will be paying more overall. Use savings, rebates, and trade-in or sell your old car to boost your down payment.

It’s a good practice to put down at least 20% of the purchase price to avoid getting into a situation known as being upside down. Cars depreciate quickly after purchase and an insufficient down payment can leave you owing more than the car is worth. This can be a problem if you need to sell the car or if it is totaled or stolen.

7. I’ve been rejected for a loan so I won’t get approved anywhere else.

This auto loan myth can be very discouraging and make people believe that they don’t have many options available to them. Lenders have different thresholds and criteria for the loans they offer. Just because one turned you down doesn’t mean they all will.

There are lenders that specialize in bad credit loans with a focus on helping borrowers secure financing for their auto loans. You may not qualify for the best rates but you do have choices and the situation is rarely as hopeless as it seems. It’s worth it to keep trying.

Auto loan myths can have a profound effect on how people shop for their car financing. Knowing fact from fiction can help you keep your focus and avoid costly mistakes. Do your research ahead of time and do a bit of comparison shopping to help you choose the right auto loan for you.